MELISSA BLOCK, host:
A year and a half ago with the economy in the early stages of what promised to be a huge recession, the Obama administration decided to test out the advice of a man who had been dead for over 60 years, economist John Maynard Keynes.
Keynes had argued that a government can pull a country out of recession by spending money, a lot of money. The stimulus plan passed by Congress pledged to do that with $787 billion. Now, economists are looking back and trying to see if this big experiment actually worked.
David Kestenbaum and Alex Blumberg of our Planet Money team have this report.
DAVID KESTENBAUM: The stimulus bill that passed was a thousand pages long. But we right here, Alex, are going to reduce it to a very, very short radio drama.
ALEX BLUMBERG: I will be playing the role of the U.S. government, which means I get to spend $787 billion.
KESTENBAUM: You don't get to just create the money out of thin air.
BLUMBERG: Yeah, you're right. I have to borrow it. So I'm going to issue Treasury bonds, basically say loan me money and I will pay you back with interest.
KESTENBAUM: Okay. So, begin drama.
BLUMBERG: Got some bonds here, bonds here. Any takers?
KESTENBAUM: Yeah, I'll buy the bonds.
BLUMBERG: Really? Who are you?
KESTENBAUM: I'm everyone. I'm the guy down the street investing money for retirement. I'm a rich oil sheik in the Middle East. I'm the Chinese government.
BLUMBERG: Oh, geez, thanks everybody. Now, I have $787 billion to spend. End scene.
KESTENBAUM: So the idea that this scheme can haul the country out of a recession may seem a little strange.
BLUMBERG: After all, I, the government, am borrowing money from people who already have it. Why not just let those people spend?
KESTENBAUM: Because they are not spending it. And this was Keynes' big idea. That economies don't always bounce back as quickly as they might, because people and companies aren't spending the money they have. So, governments have to borrow the money from them and spend it for them.
Mark Zandi is chief economist with Moody's Analytics.
Mr. MARK ZANDI (Chief Economist, Moody's Analytics): The idea is that people get nervous. They pull back on their spending; that causes businesses to lose sales. They fire more people; that causes consumers to pull back even more and you get in this self-reinforcing cycle downward. And that I think is a pretty good description of what we were in just a little over a year ago.
KESTENBAUM: Mark Zandi was a fan of the stimulus. And a year and a half ago when this old economic idea that a government could spend its way out of a recession was suddenly dusted off and debated in Congress, we called economists of all stripes to see what they thought. Many supported the idea or thought it was worth a shot.
BLUMBERG: But not everyone. Tyler Cowen of George Mason University is not a Keynesian. But back then he did tell us he was open to being converted.
Dr. TYLER COWEN (Economics, George Mason University): If we spend $700 billion and the economy recovers within a year, a year and a half, I would take that as serious evidence that my view is wrong. I don't think it will happen, but I would take it seriously.
KESTENBAUM: That is rare for someone to say: Maybe I'm wrong. Call me back in a year and a half.
BLUMBERG: It's been a year and a half, so we called him back, and...
KESTENBAUM: Tyler Cowen does not think he was wrong.
Dr. COWEN: If you just look at the actual outcome, I would say what we did didn't work.
KESTENBAUM: The economy has been growing for about a year, but unemployment is still high and Cowen thinks the economy might be turning down again, a double dip recession.
Dr. COWEN: Stimulus, for sure, it works in the short run. The thing is, what happens when you pull the stimulus away? If you simply slide back to where you were, all you've done is postpone that process of adjustment. And I think that's what we're seeing. So I view it as a kind of short-term fix that gave us some stabilizing properties but didn't really turn the economy around.
KESTENBAUM: Turn the economy around. That was Keynes' idea, that spending could restart the economic engine so it wouldn't just (makes noise) for years.
BLUMBERG: Mark Zandi, who supported the stimulus, has not changed his mind either. He thinks it has worked, that the car has started, more like a (makes noise).
Mr. ZANDI: I don't think it's a coincidence that the recession ended just about this time last year when the stimulus was providing its maximum economic benefit. So it achieved its principal objective to arrest the recession and jumpstart an economic recovery, and it succeeded.
KESTENBAUM: He admits, though, there will be a penalty down the road.
Mr. ZANDI: This costs us dearly. If you add up all the stimulus that we provided the economy, it was a trillion dollars or roughly a trillion dollars. I mean, that's very, very costly. And we're going to have to pay for it.
KESTENBAUM: Pay for it by cutting spending or raising taxes. And this really is the crux of the debate. Cowen and Zandi agree that a giant stimulus package can help the economy in the short run, and they agree there's a cost down the road. It's a question of which is larger.
BLUMBERG: So, Dave, are we saying that a year and a half after doing this national experiment, we still don't have an answer?
KESTENBAUM: No, no, we have an answer. We have two answers, they just contradict each other.
BLUMBERG: We asked Mark Zandi and Tyler Cowen: Okay, if we check in with you guys again later, what would convince you you were wrong and the other guy was right?
KESTENBAUM: Tyler Cowen said, if the economy bounces back strongly in the coming years, he'd have to wonder if Keynes was on to something.
BLUMBERG: Mark Zandi says if the debt from all the spending seems to really weigh down the economy, he'd have to wonder if maybe Keynes was wrong all along.
I'm Alex Blumberg.
KESTENBAUM: And I'm David Kestenbaum, NPR News.
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